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  • [Federal Register: March 26, 2007 (Volume 72, Number 57)]

    [Proposed Rules]

    [Page 14051-14053]

    From the Federal Register Online via GPO Access []



    Proposed Rules

    Federal Register


    This section of the FEDERAL REGISTER contains notices to the public of

    the proposed issuance of rules and regulations. The purpose of these

    notices is to give interested persons an opportunity to participate in

    the rule making prior to the adoption of the final rules.


    [[Page 14051]]



    17 CFR Part 38

    RIN 3038-AC28

    Conflicts of Interest in Self-Regulation and Self-Regulatory


    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.


    SUMMARY: The Commission hereby proposes amendments to the Acceptable

    Practices \1\ for section 5(d)(15) (``Core Principle 15'') of the

    Commodity Exchange Act (``CEA'' or ``Act'').\2\ The amendments clarify

    the definition of ``public director'' contained in the Acceptable

    Practices.\3\ The Commission believes that the proposed amendments will

    remove potential ambiguities and correct a technical drafting error.

    The amendments are consistent with the Acceptable Practices' intent to

    ensure the inclusion of truly public directors on designated contract

    market (``DCM'') boards of directors and Regulatory Oversight

    Committees (``ROCs''), as well as truly public persons on their

    disciplinary panels. The Commission welcomes comment on the proposed



    \1\ The acceptable practices for core principles reside in

    Appendix B to Part 38 of the Commission's Regulations, 17 CFR Part

    38, App. B.

    \2\ The Act is codified at 7 U.S.C. 1 et seq. (2000).

    \3\ Those Acceptable Practices were adopted by the Commission on

    January 31, 2007, 72 FR 6936 (February 14, 2007), after having been

    originally proposed by the Commission on June 28, 2006, 71 FR 38740

    (July 7, 2006).


    DATES: Comments should be submitted on or before April 25, 2007.

    ADDRESSES: Comments should be sent to Eileen A. Donovan, Acting

    Secretary, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, N.W., Washington, DC 20581. Comments may be

    submitted via e-mail at ``Regulatory Governance''

    must be in the subject field of responses submitted via e-mail, and

    clearly indicated in written submissions. Comments may also be

    submitted at

    FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansky, Acting Deputy

    Director for Market Compliance, (202) 418-5429; or Sebastian Pujol

    Schott, Special Counsel, (202) 418-5641, Division of Market Oversight,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.


    I. Background

    On February 14, 2007, the Commission published final Acceptable

    Practices for Core Principle 15 of the Act.\4\ The published Acceptable

    Practices are the first for Core Principle 15 and are applicable to all

    DCMs.\5\ They pertain to minimizing conflicts of interest in decision

    making by DCMs, and offer all DCMs a ``safe harbor'' by which they may

    minimize such conflicts and thereby comply with Core Principle 15. To

    receive safe harbor treatment, DCMs must implement the Acceptable

    Practices' various operational provisions in their entirety, including

    instituting boards of directors that are composed of at least 35%

    public directors and establishing oversight of all regulatory functions

    through ROCs consisting exclusively of public directors.\6\ In addition

    to these operational provisions, the Acceptable Practices also set

    forth a public director definition. The proposed amendments consist

    exclusively of revisions to that definition.


    \4\ Core Principle 15 states: ``CONFLICTS OF INTEREST--The board

    of trade shall establish and enforce rules to minimize conflicts of

    interest in the decisionmaking process of the contract market and

    establish a process for resolving such conflicts of interest.'' CEA

    Sec. 5(d)(15), 7 U.S.C. 7(d)(15).

    \5\ Any board of trade that is registered with the Securities

    and Exchange Commission as a national securities exchange, is a

    national securities association registered pursuant to section

    15(A)(a) of the Securities Exchange Act of 1934, or is an

    alternative trading system, and that operates as a DCM in security

    futures products under Section 5f of the Act and Commission

    Regulation 41.31, is exempt from the core principles enumerated in

    Section 5 of the Act and the acceptable practices thereunder.

    \6\ The Acceptable Practices became effective on March 16, 2007.

    Existing DCMs were given two years, measured from the effective

    date, to achieve full compliance with Core Principle 15.


    II. Need for Clarifying Amendments

    The Commission proposes to amend two subsections of the Acceptable

    Practices, Subsections (b)(2)(ii)(B) and (b)(2)(ii)(C), which together

    with Subsections (b)(2)(i), (b)(2)(ii)(A) and (b)(2)(ii)(D), establish

    the definition of a DCM public director.\7\ In general, the amendments

    address ambiguities that may arise from those provisions' different

    uses of the terms ``affiliate'' and ``affiliated.'' Such uses include

    references to corporate affiliation; personal affiliation; affiliation

    with a DCM member; and affiliation with a firm. The amendments also

    correct a technical drafting error and define ``payments.'' The

    proposed amendments are consistent with the intent of both the proposed

    and final Acceptable Practices, and should not be interpreted as a

    diminution in the level of independence that those criteria are

    intended to ensure for public directors. In light of the nature of

    these amendments, the Commission does not anticipate that it will be

    necessary to extend the comment period.


    \7\ Other than Subsections (b)(2)(ii)(B) and (b)(2)(ii)(C), the

    Commission is not proposing changes to any other provision of the

    Acceptable Practices for Core Principle 15.


    III. Description of Clarifying Amendments

    A. Subsection (b)(2)(ii)(B)

    Subsection (b)(2)(ii)(B) precludes DCM members, employees of

    members, and persons ``affiliated'' with members from service as public

    directors. As adopted, the Acceptable Practices define ``affiliated

    with a member'' as being an officer or director of a member, or having

    ``any other relationship with the member such that his or her

    impartiality could be called into question in matters concerning the

    member.'' This impartiality provision reflects a qualitative test

    intended to capture specific disqualifying relationships between

    individuals and DCM members.

    The Commission proposes to amend the definition of ``affiliated''

    in Subsection (b)(2)(ii)(B) by removing any reference to the

    qualitative ``impartiality'' test outlined above. This eliminates the

    qualitative test and replaces it with an exact articulation of the

    relationships that are prohibited under Subsection (b)(2)(ii)(B).

    [[Page 14052]]

    Specifically, the amendment states that a person is ``affiliated'' with

    a DCM member, and thus disqualified as a public director, if he or she

    is an ``officer, director, or partner of the member.''

    B. Subsection (b)(2)(ii)(C)

    Subsection (b)(2)(ii)(C) creates a bright-line, $100,000 combined

    annual payments test for potential public directors and the firms with

    which they are affiliated (``payment recipients''). A particular

    payment's relevance to the $100,000 bright-line test depends upon the

    source (``payment provider'') and nature of the payment. The Commission

    proposes to amend this subsection to define ``payment;'' clarify the

    term ``affiliate,'' as used in the subsection; remove the term

    ``affiliated'' in referring to certain relationships and replace it

    with the specific payment providers and recipients that the Commission

    intends to reach; and correct a technical drafting error.

    The first amendment defines the nature of ``payment,'' limiting it

    to compensation for professional services rendered. The amendment

    reflects the Commission's intent to capture those persons and firms

    providing professional services to a DCM and/or its members, as well as

    the employees, officers, directors, and partners of such firms.

    The second amendment to Subsection (b)(2)(ii)(C) clarifies the

    clause ``any affiliate of the contract market.'' Clarification is

    provided via explicit cross-reference to Subsection (b)(2)(ii)(A),

    which defines the affiliates of a contract market to include the

    parents or subsidiaries of the contract market or entities that share a

    common parent with the contract market. This proposed amendment is

    consistent with the Commission's original intent.

    Two other amendments to Subsection (b)(2)(ii)(C) address payment

    providers and recipients, resolving potential ambiguities arising from

    multiple uses of the term ``affiliated.'' In addition, one of the

    amendments corrects a drafting error in this subsection which resulted

    from the inadvertent inclusion of ``entity'' in the clause ``any person

    or entity affiliated with a member of the contract market'' (``member

    payment-providers provision''). The inclusion of ``entity'' in the

    member payment-providers provision resulted in a standard that

    encompassed a range of payment providers broader than the Commission

    intended. The Commission proposes to remedy its error by deleting


    With respect to ``affiliated,'' the Commission notes that the term

    is not defined in the member payment-providers provision. Potential

    ambiguity could arise in importing and applying a definition from

    elsewhere in the Acceptable Practices. Accordingly, the Commission

    proposes to amend and clarify the member payment-providers provision by

    replacing the term ``affiliated'' with a precise articulation of the

    member payment providers it intends to reach. Consistent with the

    proposed Acceptable Practices, the Commission proposes to amend the

    adopted member payment-providers provision so that it refers to

    payments ``from a member or an officer or director of a member* * *.''

    Similarly, the Commission has determined to specifically define the

    payment recipients that it intends to reach. In the adopted Acceptable

    Practices, the relevant recipients include ``a firm with which the

    director is affiliated, as defined above,'' implying a cross-reference

    to Subsection (b)(2)(ii)(B). Furthermore, through this cross-reference,

    the payment recipients provision incorporates the qualitative

    impartiality test embedded within the adopted Subsection



    \8\ Discussed in Section III(A) of this preamble.


    As previously noted, the Commission has determined that the

    qualitative impartiality test in Subsection (b)(2)(ii)(B) is best

    replaced with a specific articulation of the relevant relationships.

    Similarly, the Commission believes that a specific articulation is

    appropriate with respect to payment recipients in Subsection

    (b)(2)(ii)(C), both to remove any ambiguities which may exist and to

    eliminate the cross-reference upon which the payment recipients

    provision currently relies. Accordingly, the Commission proposes to

    amend Subsection (b)(2)(ii)(C) to reach payments made to the director

    and payments made to firms ``of which the director is an employee,

    officer, director, or partner.''

    Finally, as adopted, the last sentence in Subsection (b)(2)(ii)(C)

    states, in part, that ``compensation for services as a director does

    not count toward the $100,000 payment limit.'' This provision was

    intended to avoid the dilemma of DCM public directors forfeiting their

    public director eligibility because of compensation received for

    serving in such capacity. The Commission notes, however, that proposed

    changes elsewhere in this Subsection contain new references to various

    types of directors and that those changes may create uncertainty as to

    the meaning of ``director'' in this context. Accordingly, the

    Commission proposes to insert ``of the contract market'' after

    ``director,'' making clear that compensation for services as a director

    of the contract market does not count toward the $100,000 payment cap.

    IV. Related Matters

    A. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the

    costs and benefits of its action before issuing a new regulation or

    order under the CEA.\9\ By its terms, Section 15(a) requires the

    Commission to ``consider the costs and benefits'' of a subject rule or

    order without requiring the Commission to quantify the costs and

    benefits of its action or to determine whether the benefits of the

    action outweigh its costs. Section 15(a) requires that the costs and

    benefits of proposed rules be evaluated in light of five broad areas of

    market and public concern: (1) Protection of market participants and

    the public; (2) efficiency, competitiveness, and financial integrity of

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations. In conducting

    its analysis, the Commission may, in its discretion, give greater

    weight to any one of the five enumerated areas of concern and may

    determine that notwithstanding its costs, a particular rule is

    necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or to accomplish any of the purposes

    of the CEA.\10\


    \9\ 7 U.S.C. 19(a).

    \10\ E.g, Fishermen's Dock Co-op., Inc. v. Brown. 75 F.3d 164

    (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (D.C.

    Cir. 1985)(agency has discretion to weigh factors in undertaking

    costs-benefits analyses).


    On February 14, 2007, the Commission published final Acceptable

    Practices for Core Principle 15 that included prophylactic measures

    designed to minimize conflicts of interest in a DCM's decision making

    process.\11\ The final rulemaking thoroughly considered the costs and

    benefits of the Acceptable Practices and responded to comments relating

    to the costs of adhering to their requirements.


    \11\ 72 FR 6936 (February 14, 2007).


    The amendments herein to the adopted Acceptable Practices are

    proposed to enhance regulatory certainty by addressing potential

    definitional ambiguities and a drafting error. The removal of such

    ambiguities will facilitate the inclusion of public directors on DCM

    governing boards and committees and ensure that DCMs are able to comply

    with the requirements of the Acceptable Practices. In turn,

    [[Page 14053]]

    compliance with the Acceptable Practices will assure DCMs of their

    compliance with the requirements of Core Principle 15 as they pertain

    to conflicts of interest in self-regulation and self-regulatory

    organizations. The amendments should not impose additional costs, but

    in fact may reduce costs of compliance in light of the removal of

    ambiguities. They assure that what is intended to be a bright-line test

    operates as such. After considering the above mentioned factors and

    issues, the Commission has determined to propose these amendments to

    the Acceptable Practices of Core Principle 15. The Commission

    specifically invites public comment on its application of the criteria

    contained in Section 15(a) of the Act and furthermore invites

    interested parties to submit any quantifiable data that they may have

    concerning the costs and benefits of the proposed amendments to the

    Acceptable Practices of Core Principle 15.

    B. Paperwork Reduction Act of 1995

    These proposed amendments to the Acceptable Practices of Core

    Principle 15 would not impose any new recordkeeping or information

    collection requirements, or other collections of information that

    require approval of the Office of Management and Budget under 44 U.S.C.

    3501, et seq. Accordingly, the Paperwork Reduction Act does not apply.

    We solicit comment on the accuracy of our estimate that no additional

    recordkeeping or information collection requirements or changes to

    existing collection requirements would result from the amendments

    proposed herein.

    C. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires

    federal agencies, in promulgating rules, to consider the impact of

    those rules on small entities. The proposed amendments to the

    Acceptable Practices for Core Principle 15 affect DCMs. The Commission

    has previously determined that DCMs are not small entities for purposes

    of the Regulatory Flexibility Act.\12\ Accordingly, the Chairman, on

    behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

    that the proposed amendments to the Acceptable Practices will not have

    a significant economic impact on a substantial number of small



    \12\ See Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618, 18619 (Apr. 30, 1982).


    V. Text of Proposed Amendments to Acceptable Practices for Core

    Principle 15

    List of Subjects in 17 CFR Part 38

    Commodity futures, Reporting and recordkeeping requirements.

    In light of the foregoing, and pursuant to the authority in the

    Act, and in particular, Sections 3, 5, 5c(a) and 8a(5) of the Act, the

    Commission hereby proposes to amend Part 38 of Title 17 of the Code of

    Federal Regulations as follows:


    1. The authority citation for part 38 continues to read as follows:

    Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a-2, and 12a, as amended by

    Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    2. In Appendix B to Part 38 amend paragraphs (b)(2)(ii)(B) and

    (b)(2)(ii)(C) of the Acceptable Practices for Core Principle 15 to read

    as follows:

    Appendix B to Part 38--Guidance on, and Acceptable Practices in,

    Compliance with Core Principles

    * * * * *

    Core Principle 15 of section 5(d) of the Act: CONFLICTS OF INTEREST

    * * * * *

    (b) * * *

    (2) * * *

    (ii) * * *

    (B) The director is a member of the contract market, or a person

    employed by or affiliated with a member. ``Member'' is defined

    according to Section 1a(24) of the Commodity Exchange Act and

    Commission Regulation 1.3(q). In this context, a person is

    ``affiliated'' with a member if he or she is an officer, director,

    or partner of the member;

    (C) The director, or a firm of which the director is an

    employee, officer, director or partner, receives more than $100,000

    in combined annual payments from the contract market, any affiliate

    of the contract market, as defined in Subsection (2)(ii)(A), or from

    a member or an officer or director of a member of the contract

    market. As used in this Subsection (2)(ii)(C), ``payments'' means

    compensation for professional services. Compensation for services as

    a director of the contract market does not count toward the $100,000

    payment limit, nor does deferred compensation for services prior to

    becoming a director, so long as such compensation is in no way

    contingent, conditioned, or revocable;

    * * * * *

    Issued in Washington, DC, on March 20, 2007 by the Commission.

    Eileen A. Donovan,

    Acting Secretary of the Commission.

    [FR Doc. E7-5468 Filed 3-23-07; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: June 27, 2007